Economic consequences of the Bali tragedy

Bahtiar Arif, Center for Indonesia Reform (CIR), Lecturer, University of Pancasila, Jakarta, bahtiararif@yahoo.com

After World War I, noted economist John M. Keynes wrote a best seller, Economic Consequences of Peace (1919). He explained his approach to German reparations after the war. Keynes strongly believed that the reparations should be based on Germany's capacity, not on the extent of the damage suffered by the British and French.

A couple of weeks ago, we were horrified by the Bali tragedy that killed more than 180 people, mostly foreign tourists. We all condemn it. It could be considered the worse human tragedy in Indonesia.

The tragedy may have an impact on the Indonesian economy, which has not reached the targeted recovery. Just a couple of days after the tragedy, the Consultative Group on Indonesia (CGI) decided to postpone discussing future loan programs for Indonesia. Other creditors may follow suit. If that happens, next year the government budget will be distressed.

Some countries have issued travel advisories against visiting Indonesia due to security concerns. This means that foreign tourists will chose not to travel to Indonesia for their holidays. It may worsen the local tourist sector and foreign reserves at the macro level. It may also affect firms and individuals' incomes, especially in Bali at the micro level.

While we are not happy with the recent investment report, the tragedy may undermine investment in Indonesia. Moreover, foreign investors may delay their investment plans in Indonesia. Existing foreign investors may find alternative countries in which to invest, such as Vietnam and China. Not only would it lower economic growth, but it would also increase unemployment. In the long run it could lead to a deep depression.

We cannot blame the reactions of foreigners -- investors, creditors, tourists, etc. We would do the same thing if we were in their shoes. But the most important thing is how to manage the economy after the Bali tragedy.

Some economists say the tragedy will undermine economic growth, though the government is still optimistic about its targeted growth.

Right or wrong, the tragedy has clearly affected the rupiah. It has depreciated, albeit only slightly. But it represents diminishing business confidence in Indonesia. While our export commodities have not been competitive enough in the international market, and we are still largely dependent on imported products, the rupiah's decline will worsen the economy, causing high inflation and lack of reserves.

We must cope with the economic consequences of the tragedy. Now is not the time to depend on external resources, either investments or loans, because it is hard to convince foreigners to come in. Foreign sources should be considered accidental or voluntary.

Taking Keynes' idea, we may begin by exploring our own capacities. Local revenues should be explored to the optimum. The government should put all domestic revenues on the revenue side of the budget. There should be no more nonbudgetary items.

Then the "Indonesian New Deals" can be applied. The government should allocate funds to public works in the period when loans and investments are considered unlikely. Public investment should absorb many workers. This would solve the unemployment problem, and the economy would recover.

If people got jobs, they could afford to buy goods and services. This in turn would result in an increased demand for goods and services supplied by the private sector. The private sector would not go bankrupt, and the economic cycle would work. While investment and external resources could not be counted on, growth would be triggered from consumption and government expenditures.

The government could work hand-in hand with the private sector to rebuild the economy. A win-win solution could be achieved along with transparency and competitive principles. Public works or utilities could be financed by the private sector with profitable concessions. But the government would have to balance private and public interests.

Finally, our behavior should change. First, we should use all resources efficiently and effectively. Paper, equipment, water, electricity, etc., should be used only as needed.

Second, we should buy local products and limit the purchase of imported goods. We should be proud to use domestic products regardless of the quality. Prestige in using imported products should be limited. Domestic producers, then, need to improve the quality of products. If this works, we would develop our own technology and industry.

This plan would work effectively if the President and top- level officials proclaimed it a national program and practiced it themselves.